Public Economics презентация

Requirements
4+ homeworks
Project
Final exam
Distribution: 40-20-40
read before class
no cheating

Textbooks
J. Gruber "Public Finance and Public Policy," Worth Publishers, 2007 or later editions
Russian translation also exists
Аткинсон, Энтони Б., Стиглиц, Джозеф Э. (1995) "Лекции по экономической теории государственного сектора", Изд. Аспект Пресс, 1995.

Topics
1. Subject and methods of Public Finance.
2. Externalities. Applications to Environment and Health.
3. Public Goods. Optimal, private, and public provision.
4. Political economy. Voting. Privatization. Corruption.
5. Education. The role of government. Competition. Returns to education.

Topics (cont)
6. Social Insurance. Adverse selection and moral hazard.
7. Social security. Unemployment insurance.
8. Health Insurance. Public vs. Private. Health Care Reforms.
9. Income Distribution and Welfare programs.
10. Overview of taxation topics.
11. Local public goods. Tiebout model.
12. Fiscal federalism.

Introduction
What is the proper role of government?
Expenditure side: What services should the government provide?
Taxation side: How should the government raise its money?

THE FOUR QUESTIONS
OF PUBLIC FINANCE
When should the government intervene in the economy?
How might the government intervene?
What is the effect of those interventions on economic outcomes?
Why do governments choose to intervene in the way that they do?

When Should the Government Intervene in the Economy?
Normally, private markets are competitive and efficient.
Generally hard to justify government intervention in markets. But two main justifications are:
Market failures
Redistribution
“Abnormal” situations: crises, disasters.

When Should the Government Intervene? Market failures
“Problems” for markets:
Externalities
Private (Asymmetric) Information
Small number of agents on one or both sides of the market / market (monopoly) power
In the context of health insurance, some people are uninsured…

When Should the Government Intervene? Market failures
In 2003, there were 45 million people without health insurance in the United States, or 15.6% of the population.
Does it imply that the market does not work?
Lack of insurance could cause negative externalities from contagious disease–the uninsured may not take account of their impact on others.
Application

When Should the Government Intervene? Market failures
Measles epidemic from 1989-1991, caused by low immunization rates for disadvantaged youth, was the problem.
In 1960s: 3-4 m. cases, 500 deaths per year
In 1963 vaccine introduced; by 1980 less than 3000 cases per year
1989-1991 a huge resurgence occurred: over 50000 cases and 123 deaths.
What happened?
Solution: Propaganda plus subsidy for vaccines for low-income families.
Did it work?
Immunization rates increased from 70% to 90% in 1995: less then 300 confirmed cases.
Application

When Should the Government Intervene?
Redistribution
Government may care about both the size of the “economic pie” as well as the size of each person’s slice of that pie.
For example, society may value an additional $1 of consumption by a poor person more highly than $1 of consumption by a rich person.
Redistribution is the shifting of resources from some groups in society to others.
Other reasons?

When Should the Government Intervene?
Redistribution
Of the uninsured, for example, roughly three-quarters are in families with incomes below the median income level in the United States.
Society may feel that it is appropriate to redistribute from those with insurance (who tend to have higher incomes) to those without insurance (who tend to have lower incomes).
Redistribution often involves efficiency losses.
The act of redistribution can change a person’s behavior. Taxing the rich to distribute money to the poor could cause both groups to work less hard.

How Might the Government Intervene?
If the government wants to intervene in a market, there are a number of options:
Using the price mechanism with taxes or subsidies.
Tax credits that lower the “effective price” of health insurance.
Mandate that either individuals or firms provide the good.
“Pay-or-play” mandates that require employers to provide health insurance, such as California’s Health Insurance Act.
Public Provision
The Medicare program for U.S. senior citizens.
Public Financing of Private Provision
Medicare prescription drug cards, where private companies administer the drug insurance.

What Are the Effects
of Alternative Interventions?
Much of the focus of empirical public finance is assessing the “direct” and “indirect” effects of government actions.
Direct effects of government actions assume “no behavioral responses” and examine the intended consequences of those actions.
Indirect effects arise because some people change their behavior in response to an intervention. This is sometimes called the “law of unintended consequences.”

What Are the Effects of Alternative Interventions?
Expanding health insurance
Direct effect of government provision of health insurance for the uninsured: Roughly 44 million Americans could be covered at cost of $88 billion. This would be the intent of the law.
Indirect effect of such a policy: Some “crowd-out” of other sources of health insurance for the “free” government health insurance.
Potentially large, because nearly 200 million Americans had private insurance in 2003.
If 90 million people dropped private insurance, this would triple the cost to $268 billion.
If only 10% of people (20 million) dropped insurance, the costs would rise to only $124 billion.
Key question: How many of these people would respond? The theory does not provide guidance on magnitudes.

The Congressional Budget Office
Congressional Budget Office (CBO) provides nonpartisan analyses needed for economic decisions of the government.
Plays role as “scorekeeper” by estimating costs.
Played a role in the defeat of the Clinton 1994 health care plan because of its estimate of the cost.
Application

Why Do Governments Do What They Do?
Governments do not simply behave as benign actors who intervene only because of market failure and redistribution.
Tools of political economy helps us understand how governments make public policy decisions.
Just as market failures can lead to market inefficiency, there are a host of government failures that lead to inappropriate government intervention.

Why Do Governments Do What They Do?
For example, substantial variation across developed countries in health care delivery suggests efficiency and redistribution are not the only considerations.
U.S.: Private health insurance
Canada: National public health insurance
Germany: Mandates private health coverage
U.K.: Free national health care

FACTS ON GOVERNMENT
The size and growth of government
The “size” of the government is often measured relative to some benchmark, the most common one being GDP. It adjusts the size of government for inflation and population growth.
1930s: U.S. government spending 5% of GDP.
1970s onward: About 20% of GDP (Figure 1).
Trend is similar in other countries until 1960s; U.S. government grew more slowly thereafter (Figure 2).

Source: OMB Historical Tables: Budget of the United States Government, Fiscal Year 2004

Source: OECD Historical Statistics

FACTS ON GOVERNMENT
Decentralization and budgeting
Other features
Decentralization: In the United States., local, state and federal governments all spend substantial amounts of money (Figure 3).
Spending, taxes, deficits, and debts: Federal government was close to a balanced budget until the mid-1970s (Figure 4).

Source: OMB Historical Tables: Budget of the United States Government, Fiscal Year 2004

Source: OMB Historical Tables: Budget of the United States Government, Fiscal Year 2004

FACTS ON GOVERNMENT
Distribution of spending
Other features
Distribution of spending (Figure 7).
In 1960: over half of federal government spending on defense (a classic “public good”).
In 2001: Less than 20% of budget for defense, much more devoted to social insurance programs.
Distribution in state and local spending has not changed as dramatically; education makes up the single largest component of spending.

FACTS ON GOVERNMENT
Distribution of revenue sources
Other features
Distribution of revenue (Figure 8a and 8b).
The individual income tax provides somewhat less than half of federal revenue and has remained roughly constant over time.
Big decline in revenue from corporate income tax, now less than 10% of federal tax revenue.
Reduction in excise taxes.
Large growth in payroll taxes; now one-third of revenue.

FACTS ON GOVERNMENT
Distribution of revenue sources
Other features
Distribution of revenue different at state/local level.
Sales taxes
Grants-in-aid (from federal government)
Income taxes
Property taxes
Roughly equal in importance.

FACTS ON GOVERNMENT
Regulatory role of the government
Other features
Regulatory role–does not usually show up as a government “cost” but does increase the reach of government.
FDA regulates nearly 25% of consumer expenditures.
OSHA regulates workplace safety at 7 million job sites.
FCC, EPA.

Recap
Four key questions in public finance
When should the government intervene in the economy?
How might the government intervene?
What is the effect of those interventions on economic outcomes?
Why do governments choose to intervene in the way that they do?
How should the government intervene?
What is the optimal size of the government?

Theoretical tools (recap):
Income and substitution effects. Equivalent and compensating variations. Consumer surplus.
What are the social objectives?
Asymmetric information modeling: adverse selection and moral hazard.
Mechanism design: auctions/procurement/voting schemes/optimal taxation.
Dynamic optimization.

QM (quantity of movies)
QCD (quantity of CDs)
0
1
2
1
2
3
3

Spectrum auctions:
Governments sell licenses to use a certain range of frequencies (electromagnetic spectrum).
Many auctions. 3G are of particular interest.
“All” European countries “at the same time’’ conducted such auctions. (2000-01)
What are your expectations about the price per capita?
Findings: UK 650 Euro/pc Total: 39 Bln Euros, 2.5% of GDP (!)
Switzerland : Expectations 1000 Epc after UK auction; 400-600 Epc a week before.
Result: 20 Euro/pc
Problems: Low Reserve, “allowed collusion.”

Dynamic Optimal taxation.
(Acemoglu, Golosov, Tsyvinski)

PUTTING THE TOOLS TO WORK
TANF and labor supply among single mothers
TANF is “Temporary Assistance for Needy Families.”
Cash welfare for poor families, mainly single mothers.
For example, in New Mexico, family of three receives $389 per month.
Assume the two “goods” in utility maximization problem are leisure and food consumption.
Whatever time is not devoted to leisure is spent working and earning money.

PUTTING THE TOOLS TO WORK
Identifying the budget constraint
What does the budget constraint look like?
Assume the person can work up to 2000 hours per year, at a wage rate of $10 per hour, and that TANF is not yet in place.
Price of food is $1 per unit.

PUTTING THE TOOLS TO WORK
Identifying the budget constraint
The “price” of one hour of leisure is the hourly wage rate.
Creates a direct tradeoff between leisure and food: each hour of work brings her 10 units of food.
Figure 12 illustrates this.

Leisure (hours)
Food consumption (QF)
0
1000
1500
20,000
2000
500
15,000
10,000
5,000

PUTTING THE TOOLS TO WORK
The effect of TANF on the budget constraint
Now, let’s introduce TANF into the framework. TANF has two key features:
Benefit guarantee, G – amount that a recipient with $0 earnings gets.
Benefit reduction rate, J – rate at which benefit guarantee falls as earnings increases.

PUTTING THE TOOLS TO WORK
The effect of TANF on the budget constraint
Assume that benefit guarantee, G, is $5,000 per year.
Assume the benefit reduction rate, J, is 50%.
Figure 13 illustrates this.

Leisure (hours)
Food consumption (QF)
0
1,000
1,500
20,000
2,000
500
15,000
10,000
5,000
Slope on this section of the budget constraint is -10.
$5000 guarantee means that a recipient could now consume (2000,5000).
At 1,000 hours of work, TANF benefits fall to zero.
The benefit reduction rate of 50% reduces the guarantee as earnings increase. Green area represents new bundles from TANF.
Slope on this section of the budget constraint is -5.

PUTTING THE TOOLS TO WORK
The effect of changes in the benefit guarantee
One possible “policy experiment” is reducing the benefit guarantee level G.
What happens when G falls from $5,000 to $3,000, holding all other parameters constant?
Figure 14 illustrates this.

Leisure (hours)
Food consumption (QF)
0
1,000
1,500
20,000
2,000
500
15,000
10,000
5,000
3,000
1,400
6,000
The earnings level where TANF ends falls from $10,000 to $6,000.
Lowering the guarantee reduces the initial non-working bundle to (2000,3000).

PUTTING THE TOOLS TO WORK
How large will the labor supply response be?
What is the expected labor supply response to such a policy change?
It depends on where the single mother initially was on the budget constraint.
If she initially earned less than $6,000 per year, the policy change involves only an income effect, not a substitution effect.
Figure 15 illustrates this.

Leisure (hours)
Food consumption (QF)
0
1,000
20,000
2,000
500
15,000
10,000
5,000
3,000
1,400
6,000
The effective wage rate does not change for this person.
If leisure is a normal good, the income effect would reduce leisure (increase work).

PUTTING THE TOOLS TO WORK
How large will the labor supply response be?
If she initially earned between $6,000 and $10,000 per year, the policy change involves both an income and substitution effect.
The substitution and income effects go in the same direction.
Figure 16 illustrates this.

Leisure (hours)
Food consumption (QF)
0
1,000
20,000
2,000
500
15,000
10,000
5,000
3,000
1,400
6,000
The effective wage rate changes for this person.
The change in labor supply involves both income and substitution effects.

PUTTING THE TOOLS TO WORK
How large will the labor supply response be?
Economic theory clearly suggests that such a benefit reduction will increase labor supply, but does not speak to the magnitude of the response.
For example, some welfare recipients who were not initially working continue to choose not to work.
Figure 17 illustrates this.

Leisure (hours)
Food consumption (QF)
0
1,000
20,000
2,000
500
15,000
10,000
5,000
3,000
1,400
6,000
This person was initially out of the labor force.
She continues to stay out of the labor force, even with the benefits reduction.

PUTTING THE TOOLS TO WORK
How large will the labor supply response be?
The actual magnitude of the labor supply response therefore depends on the preferences of various welfare recipients.
To the extent the preferences are more like the first two cases, the larger the labor supply response.
Thus, theory alone cannot say whether this policy change will increase labor supply, or by how much.
Must analyze available data on single mothers to figure out the magnitude.

WELFARE IMPLICATIONS OF BENEFIT REDUCTIONS: TANF continued
Efficiency and equity considerations in introducing or cutting TANF benefits.
In a typical labor supply/labor demand framework, these changes shift the labor supply curve for single parents.
Figure 27 illustrates this.

Hours worked
Wage
H3
Labor demand
w3
H2
w2
H1
w1
Labor supply
Equilibrium with no government intervention, no deadweight loss.
Labor supply
Labor supply
Inefficient, but entails substantial redistribution.
Equilibrium with generous TANF benefit.
Equilibrium with TANF benefit cut.
Entails some redistribution and some inefficiency.